Simple Moving Average
A simple moving average (SMA) is the plain arithmetic average of the last N closing prices, where every price in the period counts equally. It is the most basic and most widely used type of moving average.
How the SMA is calculated
Add up the closing prices of the last N periods and divide by N. For a 5-day SMA, you add five daily closes and divide by five. The next day, the oldest close drops out, the newest is added, and the calculation is repeated.
Because every period has the same weight, a price from five days ago influences a 5-day SMA exactly as much as yesterday's close.
A worked example
Say a coin closes at 10, 11, 12, 13 and 14 over five days. The 5-day SMA is (10 + 11 + 12 + 13 + 14) divided by 5, which is 12. If the sixth day closes at 9, the new window is 11, 12, 13, 14 and 9, and the SMA becomes 59 divided by 5, which is 11.8. A sharp drop to 9 only moved the average down a little, which shows both the smoothing and the lag.
Common settings and uses
Popular lengths include 20 periods for short-term trends, 50 for medium-term and 200 for the long-term picture on daily charts. Because so many people watch the same round settings, those lines can become levels where traders react.
Traders use the SMA to judge trend direction, as a moving zone of possible support or resistance, and in crossover rules that compare a short SMA with a long one.
Weaknesses to know
The equal weighting is also the SMA's main weakness. Old prices count as much as new ones, so the line is slow to react to a change in trend. Another quirk is the drop-off effect: when an unusually large price leaves the window, the SMA can jump even if nothing happened that day.
Like all moving averages, the SMA describes the past. In ranging markets it gives frequent false signals, and it should not be read as a forecast.
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Frequently asked questions
What is the difference between SMA and EMA?
The SMA weights every period equally, while the EMA gives more weight to recent prices. The EMA therefore reacts faster but is also more sensitive to short-term noise.
Which SMA lengths are most common?
The 20, 50, 100 and 200-period SMAs are among the most widely used, with the 200-day SMA being a common long-term trend reference.
Is the SMA always calculated from closing prices?
Usually, but not always. Some platforms let you base it on the open, high, low or an average of these, so check the indicator settings.
Related terms
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